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How to Decide If You Have a Business or Just an Idea

Editor’s Note: Starting a new business is easy. Succeeding with a new business can be a challenge. This new monthly start-up column discusses the most effective strategies that serial entrepreneurs have used to grow their businesses. Many entrepreneurs start thinking about how to launch their businesses by strolling down the “Business” aisle at Borders or Barnes & Noble. There are literally dozens of books being churned out every year offering to help entrepreneurs get their businesses started. The authors cover everything from how to order a domain name on the Internet to leasing offices. It’s easy to get excited just flipping through these books and imagining how life would be as the next Fortune 500 CEO. There is a nasty topic many of these books gloss over – how many businesses crash and burn. I want to keep you enthusiastic about your business idea, but at the same time I want to make sure your eyes are wide open as we go through the process. According to the Small Business Administration, 552,600 firms opened for business and 660,900 closed their doors in 2009. The SBA likes to say that some of this is seasonal businesses opening and closing in the same year – examples would include the Halloween costume stores or fruit stands. Even factoring these businesses in, the numbers can be intimidating. How does an entrepreneur succeed against those odds? Do you need a great business plan? Does your business need to revolve around something you can patent? How much cash should you carry to get the business through that critical first year? These are the wrong questions. Each of them leads you down the path of spending time and money before you know what you are getting yourself into. The most important question an entrepreneur needs to ask themselves is this: Is my idea something that can be a real business, or is it just an interesting idea? Offering solutions New products and services revolve around solutions to problems. Not all solutions are businesses, though. A solution needs to address a problem that is so big that enough customers will want the solution. It needs to solve a problem that is painful enough for customers to be willing to pay to relieve the pain. The customer needs to be willing to pay enough for the solution to make a profit for the solution provider. Your solution should solve a problem that a customer understands they have, or like the iPod, is something the customer may not have seen as a need but can rapidly understand its benefits once the solution hits the market. Once you have identified a solution to a problem, how do you decide if enough customers will actually buy it? Market research is the answer. There is no worse feeling than spending thousands of dollars developing a product only to look on the web three months later and find out there are ten pages on Google listing companies offering the same product. If your Web search teaches you that there are similar solutions out there, but not one that addresses the problem the way you do or misses a big part of the problem, then you should move on to the next stage. Find some potential customers and ask them what they feel about the problem you have identified and your thoughts on how to solve it. Using web surveys like Zoomerang can be very cost-effective. For a minimal sum, you can have a survey sent out to a select audience with a wide variety of questions. Now some readers will be shouting out loud at this point. “Tell someone my idea! They’ll steal it and I’ll be screwed!” Here’s the reality check: if your idea is so simple that by listening to you for thirty seconds I can figure out exactly how to implement the solution on my own, it’s probably not that brilliant. Telling the basic premise behind your solution isn’t going to put your business idea in great peril. Handing someone your detailed business plan or lending them a prototype to play with before you have them sign a confidentiality agreement is another matter, but try to keep your eye on the prize – determining the value of your solution. Drawing up a budget Once you have done your market research, the next big hurdle will be putting together a budget. Starting a company without confirming what it will cost to run the operation, assuming everything goes wrong and there is no cash flow for the first several months, is critical to avoiding a personal financial meltdown. We will give you an idea how to approach these items in a future column. A personal finance inventory check is also an important exercise. If you can start your business as a second job, that’s great. If you have saved all of your acorns and can carry yourself for the first year, or you have a rich uncle, that’s great too. Be extremely careful going into debt to set up a business. Racking up enormous credit card debt or remortgaging the house is a fantastic way to end a marriage. Lastly, be certain you are the right person for the job. It can be a huge undertaking to quit your job, put your own cash and your family’s future on the line. Launching a business can also be a lonely, isolating experience at first since you are likely to be a one man band at the start. Being good at handling “no” thirty times a day is also valuable. The temptation to start a business as a way to fire your boss or call yourself a CEO at the chamber of commerce mixers can be great, but is a terrible justification for a major life change. Make sure you have thought things through. By working through these issues, you have been able to test the viability of turning your great idea into a business, or know to go back to the drawing board. Matt Crowley is a veteran venture lawyer who has participated in over $6 billion in deals. He was also on the frontlines during the first dot.com era as a start-up general counsel. He is a member of the L.A. Venture Association’s executive committee and a graduate of the 2010 Leadership L.A. program.

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